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High-stakes investing isn’t for the faint of heart. It involves committing substantial capital to strategies that promise considerable returns but also carry significant risks.
Investors engaging in high-stakes investing usually seek to maximize their income, achieve financial independence, or secure a comfortable retirement. While the potential yields are charming, the stakes are equally high, as poor decisions can lead to considerable losses.
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One such high-stakes investor took to Reddit to share his strategy and seek feedback. With $1.7 million to invest, the poster is considering putting the entire sum into Schwab U.S. Dividend Equity ETF (NYSE:SCHD), a popular dividend-paying ETF.
He aims to generate reliable income while allowing for some growth through reinvestment. The investor projects an annual profit of $288,750 from dividends, covered calls, and capital gains.
“This calculation does not take into account that along the way I’ll be reinvesting most of the dividends and covered calls back in to increase shares that can be sold as covered calls, dividends and share price gains to be returned. Nor does it take into consideration the fact that I will occasionally get called on my shares and can sell a cash-secured put for extra income,” the poster wrote.
The investor’s primary concern is whether his approach is realistic and sustainable. His post has sparked a lively discussion in the comments, with many Reddit users offering advice and critiques, so let's dive deep into that.
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Diversify Beyond SCHD
Many commenters highlighted the importance of diversification, arguing that putting $1.7 million into a single ETF is unnecessarily risky.
“$1.7 million would purchase about 60,000 shares, which would generate about $60,000/year in dividends. If you want growth, this isn't the way to do it. If your goal is some income with growth potential, SCHD is a good choice. My preference is to pair it with [iShares Core Dividend Growth ETF (NYSE: DGRO)],” reads a comment.
One Redditor suggested the investor add high-growth ETFs to capitalize on emerging trends.
“You are missing out on technology exposure, which will be significant over the next decade as generative AI and robotics really take off. For this reason, consider allocating a portion to [Schwab U.S. Large-Cap Growth ETF (NYSE: SCHG)] or [Vanguard Information Technology ETF (NYSE: VGT)],” he said.
Another comment reinforced the idea that diversification should extend beyond domestic markets to include international investments.
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“You need growth as well unless you are retired already. Maybe a SCHG as well or a fund like it, plus some international exposure,” the comment reads.
“Diversify into like 10 different stocks and ETFs. Don't just buy all of one,” another Redditor suggested.
A comment recommended the poster explore alternative income-focused ETFs and high-yield stocks to complement SCHD.
“You will usually see [JPMorgan Equity Premium Income ETF (NYSE: JEPI)]/[JPMorgan Nasdaq Equity Premium Income ETF (NASDAQ: JEPQ)] suggested but not my cup of tea. I would probably look at [SPDR Portfolio S&P 500 High Dividend ETF (NYSE: SPYD)] and maybe put in a few super high-yield stocks like [Enbridge Inc. (NYSE: ENB)],” the comment says.
Covered Calls Might not be Worth the Effort
While many Redditors in the thread somehow agreed with the investor’s strategy, some questioned the feasibility of his covered calls approach, pointing out that the returns might not justify the risks and tax implications.
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“The covered calls are not worth it. You will pay so much in fees and you will get assigned. You will pay more in taxes too because you have a short-term gain on the selling and premiums. I would take 5%-10% of that and wheel options on some stocks you really want to own for higher premiums or wheel [Invesco QQQ Trust (NASDAQ: QQQ)],” a Reddit user noted.
“The plan is viable but there is one major flaw in the assumptions. You cannot have both the appreciation and the covered call returns. By selling covered calls [at the money] or slightly [out of the money] (which is what I assume you would do) you will miss on the big appreciation periods eating away your stock returns,” another comment reads.
Finally, one Redditor suggested that the tax implications of covered calls could erode returns.
“If not in a tax-shielded account, taxes on those calls will be significant. In a Roth IRA, it would be 0%, so you are much better off just buying a higher-yielding asset,” he said.
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This article High-Stakes Investor With $1.7M Chooses SCHD Over Diversification – Is His $288,750 Annual Profit Projection Realistic? Reddit Argues originally appeared on Benzinga.com
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